Senior Writer: Hiba Ali
Pricing is one of the most critical elements in determining revenue. However, the average SaaS startup spends just six hours every day defining, testing, and optimizing its pricing strategy.
The confusion is understandable – with so many software pricing models, strategies, and tactics available, it’s hard to know what to do. For that reason, we will explain, explore and analyze the two crucial components of a profitable pricing strategy for SaaS.
– Pricing models to balance your product value and revenue.
– Pricing strategies for achieving growth.
Suitable SaaS pricing strategies can attract potential customers and sell more subscriptions, increasing monthly recurring revenue.
What is SaaS Pricing?
A SaaS pricing model is one where customers pay on a subscription basis to use online software. Target markets, revenue objectives, and marketing strategies influence SaaS prices. An attractive software pricing model can be beneficial if pricing is a major deciding factor in purchasing a SaaS product.
SaaS (Software as a Service) is an online application distributed to customers as a subscription service. Therefore, developing a well-thought-out pricing plan is essential to ensure your SaaS products’ success. Sales Hub is SaaS, and so is Google Analytics.
The success of SaaS products depends mainly on the balance between customer lifetime value (LTV) and customer acquisition cost (CAC). At its most basic level, you won’t grow unless you have a significantly higher LTV than your CAC.
Why is SaaS Pricing Important?
An adequately priced SaaS product accomplishes two things: it provides customers value and gives companies an edge over their competitors. Of course, customers may not resubscribe if you charge too much, but you should charge enough to remain profitable.
As far as offering customers value goes, it’s as simple as this: when you buy a new car, you want to ensure that you’re getting something that will be worth the money. Businesses looking for SaaS products think the same way.
The cost-to-value ratio refers to the balance of SaaS benefits you deliver compared to the amount of money they spend on your service. You don’t want them to subscribe to your service and feel they’re not getting what they paid. Instead, you want them to consider their decision and say it was worth it.
Market competition will be viable if you choose a pricing model that provides the best cost-to-value ratio.
Best SaaS Pricing Strategies
Your pricing model drives your SaaS business’s repeatable sales processes and recurring revenue: it’s the foundation of your business.
As you work toward your overarching goal of “growth,” you will have various plans to reach within the framework of your pricing model. Therefore, pricing strategy for SaaS operations play a vital role in achieving these goals for your SaaS Business.
These strategies are suited to meet different objectives: rapidly expanding into a new market or attracting precious customers. It would be best if you chose a general pricing strategy before deciding on the price tag that you will place on your SaaS product. You can set SaaS fees based on different subscriptions and levels on shadow it.
For example, will you calculate your business expenditures monthly or annually, then add a markup to earn a profit (cost-based Pricing)? On the other hand, do you plan to look at your competitors’ prices and base yours on theirs (competitor-based Pricing)?
We’ll look at a few pricing strategies and models below to determine the results of a good SaaS pricing strategy:
1. Cost-Based Pricing Model
A cost-based pricing strategy is a method by which companies evaluate the costs associated with providing their services, such as product development and employee salaries, and raise these costs by a certain percentage point to ensure they generate a return on their investment.
In other words, if the cost of designing your software is $100, you may sell it for $125 to ensure a 20% profit.
2. Competition-Based Pricing Model
When pricing products or services based on competitors’ prices, you can price software above, the same, or below them. Competitor-based pricing is a promising strategy for companies marketing new SaaS management software.
Unfortunately, if your service hasn’t been on the market long enough for customers to vouch for its value, you’ll have to discover another way to capture market share. In addition, the software may be so newly developed that you’re unaware of all the costs associated with providing it.
You will not want to start too high and scare customers away or go too low and leave them questioning your product’s value. Using a competitor’s price point can help you decide your SaaS prices.
3. Penetration Pricing Model
As a form of promotional pricing, penetration pricing involves reducing prices temporarily to create demand quickly. The price reduction is often accompanied by a set timeframe, which you may or may not share with customers. For example, a product might be offered at an introductory price of $79 for six months, then quietly raised.
Alternatively, you could offer 50% off your product’s fees for the first 100 customers, but only for a limited time. After that, customers may feel compelled to act fast, which can benefit you, mainly if your price is competitive with your competitors.
4. Value-Based Pricing Model
The most suitable pricing strategy for SaaS enterprise is Value-based pricing, refers to pricing products and services based on their value to their target audience rather than cost or competitors’ prices. This strategy does not focus on a company’s costs or competitors’ prices. Instead, what the target audience expects from the product or software.
You may be able to price your service higher than your competitors, generating more revenue if your customers understand the value of your service. This model also allows for price reevaluation, should your service need to be changed or updated.
As a value-based software provider, Adobe’s apps are more expensive than alternatives like Affinity Photo and GIMP. However, the company knows how much value it provides its customers, so it prices its products accordingly.
5. Freemium Pricing Model
A growing number of SaaS companies use freemium pricing due to high-profile success stories like Slack, Evernote, and Dropbox: offering a free product alongside additional premium features. The freemium business model is commonly used as a tiered pricing strategy: regularly paid packages are supplemented with free, entry-level packages.
A specific usage level is then used to limit that tier across exact dimensions, typically employing feature-based limits, capacity-based limits, SaaS security, or use-case limitations. Live chat SaaS Drift uses an excellent device of freemium pricing.
They offer small companies a “free” package to talk to their first 100 contacts for free. Once the demand for the service exceeds that point (which is likely correlated with an increase in revenue and company size), it becomes necessary to upgrade.
SaaS Pricing Models: How to Price a SaaS Product
Checkout different SaaS pricing models for pricing a SaaS product:
1. Per-Feature Pricing Model
The customer pays for features such as email automation, chatbot services, or ad lifecycle management, similar to tiered pricing. Per-feature pricing is a solution for those who want to set a flat rate but don’t want features to go unutilized.
Amazon AWS follows a feature-based pricing model. You can add the services you’ll need to the AWS pricing calculator, then figure out how much your yearly investment will be.
Pricing packages vary by the number of features of each model, so higher-priced packages come with the most features. Typically, more expensive packages include all elements from the lower-tiered plans.
- Strong upgrade incentive
- Overpriced packages provide valuable features
- Limited features
2. User-Based Pricing Model
A SaaS company will charge its customers a fee based on the number of seats, or users, in their account. Many SaaS companies use this model. Customers will be charged a monthly rate for each user account. For example, depending on how much they use your service, you may charge $5 for personal accounts, $40 for ten users, and $60 for 200 users.
As customers may be hesitant to choose this pricing if they’re looking to grow, this package lets them know what their monthly bills will look like. You may opt for a service that allows them to grow, regardless of price, if they know that hiring more employees means higher software costs.
Alternatively, some companies attempt to avoid this problem by charging per active user. This allows companies to have all their employees sign up but only pay for those who use the service.
- Revenue scales with adoption.
- Predictable revenue generation.
- Limits adoption
- It makes it easy to churn
- It doesn’t mirror the actual value.
- Unattractive to expanding businesses.
3. Flat-Rate Pricing Model
Flat rate pricing is the easiest way to sell if you offer a single product, a single set of attributes, and a single price for a SaaS solution. The flat rate pricing model bears a lot in common with the software licensing model before cloud infrastructure existed, but (usually) it is billed monthly, which makes it easier to sell.
Even though flat rate pricing is few and far between (Buffer’s Awesome plan has recently been the most popular in recent years), eCommerce SaaS CartHook continues to use it. Access to the company’s features is available for $300 per month (or $2,400 billed annually).
- Easy to sell
- Communications are more effortless
- The most straightforward pricing model
- Getting value from different users is difficult
- A one-shot shot at securing customers.
- Decreased profits
4. Usage-Based Pricing Model
This kind of package is known as the “the more you use, the more you pay” model, like cellphone data. For example, you may get a monthly 2GB plan, but you will be charged more if you go over it.
This model’s strength is that the advertised prices are always lower than the monthly billed costs. A low price point can make your service more appealing to users and entice them to use it.
In addition, smaller companies know they won’t pay the same price as enterprise companies, so they’ll feel like they’re getting a good deal. Oracle’s data integration platform is an example of usage-based SaaS pricing.
Many SaaS companies are increasingly adopting the model, charging for scheduling posts on social media or per invoice on SaaS accounting tools.
- Prices scale with usage
- Enhances user accessibility
- Accounts for “heavy user costs
- Revenue is more difficult to predict
- Revenue is more difficult to predict
5. Tiered Pricing Model
A tiered pricing plan offers multiple package options based on features and prices. Each tier can be tailored for a specific buyer persona – such as a single user or a medium-sized business.
Not all users need the same features or the same amount of features, so this option allows them to choose accordingly. Tiered pricing is one of the most prevalent SaaS pricing models.
- Multi-persona appeals
- Saves money
- Clear upsell route
- Potentially confusing model
- High level of risk for users
Pricing for SaaS relies on two key factors: charging for the product’s value and targeting the right audience. If you research these factors correctly, your customers will reward you with their purchases.
Ultimately, all SaaS companies will choose a pricing strategy and billing model that fits their individual needs as they grow and roll out new software additions, so it’s crucial to remember that companies can permanently change prices over time.
Your customers will appreciate your costs and subscribe to your service if you put time into your plan.
Frequently Asked Questions
It is vital to understand the three components of a successful SaaS pricing strategy- the pricing model you will use to balance value and revenue, the pricing strategies you will use to grow, and the psychological pricing tactics you will use to tweak your price to simplify SaaS prices.
Before you set a price for your software product, you should consider the following factors:
- Product development costs
- Infrastructure costs
- Revenue goals
- Analyzing the cost of competitive products
It refers to a pricing model for online software based on a subscription model. The target markets, revenue objectives, and marketing strategy of the product or service affect the pricing.
The most successful SaaS pricing models are as below:
- . Flat rate pricing
- Usage-based pricing
- Tiered pricing
- Per-feature pricing
When it comes to pricing models, there is no silver bullet. Pricing models work best for diverse companies and different types of customers -- you can only find your company's optimal pricing model by following your pricing process and analyzing your customer data. However, The basic SaaS pricing model is flat-rate pricing.
Your SaaS company can determine its cost-based pricing by calculating the cost of developing and maintaining a product, then adding a small percentage markup. For example, suppose your software costs $100 to design, with a 30% markup, and you sell it for $130 to earn a 30% profit.
To select the ideal pricing model for software, it is essential to remember that every job is unique, and the client needs to choose a pricing model based on the project's requirements. The main selection criteria are as follows:
- Project complexity
- Team size
- Budget limit
- Project time frame
- The level of control you expect over the development team.